What is the difference between tax fraud and tax negligence, and why does it matter? P.3

We’ve been looking in recent posts at the difference between tax fraud and negligence, and emphasizing the importance of taxpayers working with an experienced attorney when the IRS decides to investigate reporting discrepancies.

It is important for the taxpayer that a tax investigation is as accurate as possible, since the penalties he or she faces, if any, depend on the investigator’s conclusions and subsequent agency actions based on them. Working with an experienced attorney during the audit process can help ensure these matters are effectively addressed and that the taxpayer’s interests and rights are protected throughout the process. This is particularly important if an audit is likely to result in penalties or referral for criminal prosecution.

Different standards of proof and penalties apply for tax fraud and tax negligence. In determining what penalties are appropriate, the IRS takes all the circumstances of the case into consideration, including the level of knowledge the taxpayer had, whether the taxpayer relied on the advice of a tax attorney or the services of a return preparer. The taxpayer’s explanations for discrepancies are important to navigate in this regard.

Even if a taxpayer’s case is not referred for criminal investigation, it is still possible to face civil fraud charges. A lower standard of proof applies for civil fraud, but the penalties can still be significant. Working with an attorney in the process allows a taxpayer not only to provide all the necessary information, documentations, and explanations necessary, but also to have sound representation in negotiating any penalties that may arise.